Ichimoku Kinko Hyo: indicator and a trading strategy

Leave a Comment

Many players in the Forex market have tried and are trying to find a win-win trading system. But, for those who are familiar with the Game theory, it is obvious that absolutely no-lose options for working in financial markets do not exist. It is possible only on the one hand to try to reduce risks, and on the other hand to increase the amount of the winnings or the percentage of profitable trades. From the postulates of the Game theory itself, it follows that these problems are in inverse proportion to each other. If you do not enter the market, then the price of your trade is zero, but the risk is zero.

If you enter the market very often, then your winnings can be very large, but the likelihood of losing also increases.

Where is the golden mean, which can allow you to achieve harmony between a reasonable risk and a sufficient amount of winnings? Many solutions for this have been proposed. One of them is trading using the Ichimoku Kinko Hyo indicator.

Many of you, for sure, know about the existence of Ichimoku, but only a few use it in their trading systems. Meanwhile, it is included in many different programs for analyzing financial markets and MetaTrader 4 / Metatrader 5 is not an exception. Despite this, there is not enough information on its use in English. Therefore, today we will get acquainted with this remarkable indicator closer.

Ichimoku was developed by the Japanese analyst Hosoda Goichi, better known under the pseudonym Ichimoku Sanjin, for the analysis of stock markets in the 30s of last century. Later it began to be used in the Forex market. The indicator is designed to determine the market trend, support and resistance levels, and to generate buy and sell signals. Best of all, it works on weekly and daily charts.

Indicator characteristics

Platform: MetaTrader 4
Currency pairs: EURUSD, GBPUSD, EURJPY, GBPJPY, EURAUD, GBPAUD, EURCAD, GBPCAD, EURNZD, GBPNZD, USDCHF, GBPCHF
Timeframe: H1 — W1
Trading time: round the clock
Recommended brokers: Roboforex, Alpari, AMarkets

History of Creation

The term “Ichimoku” can be translated from Japanese as “instant view” or “one look”, “Kinko” is the equivalent of “balance”, and “Hyo” means “chart”. Therefore, the full name of the indicator “Ichimoku Kinko Hyo” actually means “one look at the chart cloud”.

Or, a more appropriate name - “instant presentation of balance on the chart”. Goichi Hosoda developed the indicator of Ichimoku at the beginning of the Seva era (1926-1989). However, Hosoda, who is a Japanese newspaper journalist, published his results only in 1969, and from that moment the Ichimoku indicator became a permanent tool for Japanese traders.

Japan is an ancient civilization with its way of life and approach to life, a measured and unhurried flow of time. Traditions and customs of the samurai were formed over the centuries. That’s what we owe to the appearance of one of the first theories of trading in the market, namely candlestick analysis. As early as the middle of the 18th century, a man named Munechisa (Sokyu) Honma, who traded rice, originated from an ancient Samurai family, developed the basic principles of this analysis for trading on the rice market.

Naturally, he conducted his research for trading on a fairly “slow” (in modern terms) market. However, living to this day, this theory is quite successfully used by modern traders – thinking even of the Price Action.

Japanese analyst Hosoda decided to develop a candle analysis. To do this, he created an indicator, which was a trading system that answers the questions: when to enter the market, where to put a stop-loss, where to fix the profit?

He created his system for trading contracts on the Nikkei index. The indicator there showed excellent results. It turned out that the main advantage of the mathematics of this indicator is that it makes it possible to distinguish the range from the trend, and at least, get a small profit from the trend. Hosoda himself noted that the indicator works well in the trend, allowing to catch sufficient kickbacks and after their termination continues to work on the trend.

Ichimoku Description and Settings

The Ichimoku indicator successfully combines a number of other indicators and various approaches to forecasting the prices movement. Each line represents the middle of the price range for a certain period of time. So, it demonstrates the dividing line of the predominance of bulls, bears, strength of the market. You can also say - the consensus of the masses about the cost for a certain period.


In determining the dimension of the parameters, four-time intervals of different lengths are used. The values of the individual lines constituting this indicator are based at these intervals,:

  • Tenkan-Sen (Conversion line) shows the average value of the price for the first period of time (usually period 9), defined as the sum of the maximum and minimum for this time divided by two;
  • Kijun-Sen (Main line) shows the average value of the price for the second period of time (counted for 26 periods);
  • Senkou Span A (Leading Span 1) shows the midpoint of the distance between the previous two lines, shifted forward by the value of the second time interval (26 periods);
  • Senkou Span B (Leading Span 2) shows the average value of the price for the third time interval shifted forward by the amount of the second time interval (52 periods);
  • Chinkou Span (Delay sweep) shows the closing price of the current candle, shifted back by the value of the second time interval.

Classical settings of Ichimoku (9-26-52) when trading on H1 cover about half a week’s cycle and, so they can be freely used. But still, with sharp price movements during the day, Ichimoku decently loses on the forecasts accuracy.

Therefore, it is common to use other settings for intraday trading:

  • Settings (12-24-120) are considered good in the trendy nature of the markets. If you find the price in long channels Ichimoku with these settings will give a lot of false signals, but when working in a trend the profit will be maximum;
  • Another configuration option (120-240-480) allows you to receive only significant signals on the hourly charts and successfully filter the periods of the flat. Signals will become decently smaller, but they will be more accurate.

Calculation

Now that we have become familiar with the general look of the indicator, you can go to the calculation formulas using the example of standard settings:

  • Tenkan-sen turn line = (Highest high + Lowest low) / 2 over the last 9 periods;
  • Kijun-sen main line = (Highest maximum + Lowest low) / 2 for the last 26 periods;
  • Leading span 1 Senkou Span A = (Standard line + Turn line) / 2, built 26 periods ahead of the current time;
  • Leading span 2 Senkou Span B = (Highest high + Lowest low) / 2 over the past 52 periods, built 26 times ahead of the current time;
  • Lagging Span Chinkou Span = the closing price of the current candle, shifted by 26 periods back.

Rules of Trade

Let’s take a closer look at the purpose of each line. The series of lines are very similar to the moving averages and are based on the maximum and minimum prices.

The distance between the Senkou Span A and B lines is hatched on the chart by another color and is called a “cloud”. If the price is between these lines, the market is considered as non-trendy. The edges of the clouds form the support and resistance levels.

  • If the price is above the cloud, its upper line forms the first level of support, and the second - the second level of support;
  • If the price is under the cloud, the lower line forms the first resistance level, and the upper one - the second level;
  • If the price breaks the bottom line of the cloud downwards, it is a signal to sell, if the top line is crossed upwards – it a signal to buy.

Crossing the line of the Senkou Span B line is the strongest signal for entering the market (especially if the prices have come out of the cloud). This is the first element of the system - breakdown.

Kijun-sen is used as an indicator of market movement. If the price is higher than this line, prices are likely to continue to grow. When the price crosses this line, a further trend change is likely. Another option for using Kijun-sen is to send signals. In a broad sense, the intersection of Tenkan-sen above Kijun-sen is a bullish sign, and the intersection of Tenkan-sen below Kijun-sen is a bearish sign.

Tenkan-sen is used as an indicator of the market trend. If this line grows, there is a trend up. If it falls - the trend is down. When it goes horizontally - the market entered the channel.

A buy signal is generated when the Tenkan-Sen line crosses Kijun-sen from the bottom up. From top to bottom - a signal to sell. At the same time, for this type of signal there is even a name - a “gold cross” for purchases and a “dead cross” for sales. In general, this is the weakest signal given by the indicator.

Especially neatly you should use if the prices are in the cloud. Such transactions should be avoided if you have little experience. The creator of the indicator believed that it could be entered upward if the prices were below the lower boundary of the cloud and downwards - if higher than the upper one. The problem here is that the cloud must be large enough to record profits in the real market. This is the second element of the system, the long-term trend.

The relative position of today’s price is added to the price positions in relation to the cloud and the intersection of Tenkan-sen and Kijun-sen against the price of 26 periods back, which determines the strength of the signals - Chinkou Span. This line (the lagging span) is today’s price, shifted back to 26 periods. If Chinkou Span is below the prices of 26 periods ago and there is a sell signal, then this is a stronger signal than it would be at the price position above the close of 26 periods ago. The opposite statement will be true for the buy signal. That is, in fact Chinkou Span is a trend filter.

Also, the line generates signals to enter - if it crosses the chart from the bottom up - we get into the purchase, if from the top down - in the sale. This signal is considered to be the second strongest signal from the Ichimoku indicator. This is another, the third element of the system - a medium-term trend.

If all lines of the indicator are aligned in a hierarchical sequence, then the signals for clearing are combined by the concept of “three-line signal”. This signal allows you to use the trend when its start is skipped. The author recommends not only to open a position when the price is rolled back from the lines of Ichimoku or when crossing the Tenkan lines with Kijun, but only if there is a reversal candlestick pattern.

The use of Ichimoku in the Forex market by various traders showed that with undoubted advantages of the indicator, it has one drawback for intraday trading: placing a stop-loss behind a cloud of prices often shifts the price of the trade not to our side. At the same time, the yield when changing the trend does not allow you to fix a sufficient profit. Therefore, it is worth working with it only on the D1 and W1 charts.

The stop-loss is usually set outside the boundary of the cloud opposite the direction of the entrance. For example, if we are working on breaking the clouds from the bottom up, then we place the stop-loss below the lower boundary of the cloud, and if from the top down - then above the cloud.

It is recommended to maintain a certain reserve of about 5-10 points to exclude the possibility of false triggering on volatile movement. After changing the boundaries of the cloud, it is recommended to move the stop-loss of your order. The exit from the transaction is usually made upon receipt of any reverse signal - a Tenkan-sen turn, a reverse crossing of the chart by the Chinkou Span line, the reverse crossing of the cloud price line, and so on.

When opening the position for a long perspective (on daily or weekly charts), intraweek news are usually not taken into account, but macroeconomic factors and political events that can affect the fact that the trend will be broken or kickback will begin are taken into account.

The basic rules of trading on the Ichimoku indicator bring about 60-70% of profitable trades with a risk-to-profit ratio of about 1:3. Therefore, many traders in the Ichimoku trade insure their decisions also by analyzing the ADX indicator.

Hosoda also emphasized that his indicator is the development of candle theory. Therefore, the author does not recommend opening the position, if there are candle patterns that contradict the main signal. It is also very good if the signal is further confirmed by a candlestick pattern. Moreover, when trading bounces from the Ichimoku lines, the presence of a candle pattern is a prerequisite.

Taking into account the candlestick patterns for the analysis will increase the number of profitable trades to 70%. The frequency of transactions on the daily charts will be approximately one position in two weeks per instrument.

The percentage of profitable trades can be increased even further if we analyze the so-called Kagi graphs in addition and if the indications of all the instruments coincide. According to some experienced Ichimoku Kinko Hyo fans, you can achieve profitability of 80-85% of deals with a profit-to-loss ratio of up to 3 to 1, while making an average of 200-300 points of profit per month for one currency pair.

Conclusion

The Ichimoku indicator is one of the most complex classical indicators. At the same time, it is one of the most effective tools, representing a whole ready multi-element trading system. In one indicator, there are breakout, and trend, and counter-trend signals, clearly defined exits, stop-loss places and even trailing stops.

Even though the indicator shows very good trading indicators, it is not very popular among traders. Most likely this is due to the complexity of analyzing its signals and a period of work no lower than daily charts, which is not popular with most currency speculators. Nevertheless, I would definitely recommend Ichimoku for those who like a more measured trade and adherents of candle analysis.

Regards, Michael

ForexTraderPortal.com

Related Posts: